Low Income Senior Housing, HAP Contract, Should I buy?

Question

I have found a Low Income Senior Housing apartment complex that is operating under a HAP contract from HUD.  This property is in a very tiny town in rural Missouri, and if it were not for the HAP contract, the community would not otherwise be able to support the apartments.  I have never been associated with HUD or HAP contracts in any way, but the very low purchase price and very good condition of this property captured my interest.  By all other conventional measures, the property is a steal, and I would buy it in a heartbeat, but I am finding it very difficult to get good information from HUD and others as to how to manage this type of property to maximize profit.  It seems capturing profits under this type of scenario is quite elusive.  What things are required for a for-profit investor to make this worth his while?  All input is appreciated.

Vitaly Lunev · Answer

It is an old thread but wanted to add my two cents. It sounds like the property has an old version of the HAP contract that were much more restrictive than the new ones. My recommendation would be to buy the property with some sort of bridge financing. Then work with an experienced LIHTC investor like @Ryan Daniher to get the new 4% tax credits allocated to the property and get an experienced Affordable lender to refinance the property under FHA insured 223(f) PILOT (the program specifically designed for projects with LIHTC). This will allow you to renovate the property, which in turn will serve as a justification for higher rents and allow you to submit mark-up-market request for the HAP contract. This will mean that you will get a new 20 year contract with the new terms including the more generous profit disbursement schedule. You will also be compensated for that work with a Developer Fee.

Zach Quick · Answer

@Greg Castor How small of a town are we talking about? I think that vacancy would definitely be an issue.  There is a small senior complex not far from me similar to this that is really struggling to fill empty units simply because of population decline.  I think that and the red tape may make cause the low price.

If you PM me I know of a Missouri based company that primarily deals with low income managing that may be of help.

Michael Penny · Answer

Phil,

I am currently engaged in a conversation with a seller with a similar property.  Did you end up buying this property?  If so and you have experience now, would you be willing to have a quick call with me in the next couple of days and allow me to ask you a few questions.

Thanks for considering,

-Mike

Phil B. · Answer

I know this is an older thread, but I posted about a similar deal and wanted to know if anyone had any insight on this.

I'm under contract on a 24 unit, independent senior housing complex. It currently has a 20 year HAP in place with an annual 1.4% rent increase. It currently has a waiting list and is a 7% cap.

Someone mentioned to me that 20 year HAP's are bad because expenses on the property will only go up (for example taxes, and if the area sees growth then presumably maintenance and repair labor will go up), and cannot raise rents enough annually to keep up with those growing expenses.

Does anyone have any insight on this? Or does anyone currently use HAP contracts as a strategy, or own independent senior housing with a HAP in place?

Greg Castor · Answer

David Nail, I followed up with the owners of this property a couple of months ago and they had just found a buyer and were about to close on the property.   If I happen to run across another similar opportunity, thanks to those of you in the BP community who have reached out to me, I now have contacts to work with.

Ryan Daniher · Answer

@Greg Castor

Is it a tax credit property too? I am aware of profit restrictions on tax credit properties, but not Section 8 deals. It would not make sense as an investment if you can only capture 2% of the profits. I've heard that section 8 properties can be operated at a very low expense. Have you received any updates in the last 2 months?

Ryan

Greg Castor · Answer

Current vacancy is very close to 100% and there is generally a waiting list.  The market rents are good, expenses are in line, but you can only report a few thousand dollars of profit or there will be no additional rent increases.  All other investors who were interested in this planned on managing the property themselves, and were going to use this to put the bulk of the "profits" in the management expenses.  I planned on hiring a property management company (who must be HUD appproved), and because of this, I had no profit shield.  As the current owners explained it to me, approx 2% was the most profit allowed.  What is the best way to handle this?  I don't know if it is still on the market, but I would love to find a way to make this work.

Ryan Daniher · Answer

@Greg Castor In my experience, a HAP Contract has increased the rental income possibility of a property closer to market rate. Take out any vacancy factor, reduce your tenant turnover possibility, guarantee rent checks, and increase your rent levels at a consistent 2% each year.

The difficulty in HAP Contracts from what I see is actually being able to get one. If the property already has a HAP, you should have no problem receiving a new 20-year contract.

What kind of operating expenses are you running? Does the property have a high CapEx?

Greg Castor · Answer

Ryan, I tried every way I could find to make this work, but the HAP contract prevented me from taking any substantial profits, and operating it separate from the HAP contract was not workable because the units would be difficult to keep at high occupancy levels.   Did I miss something?

Low Income Senior Housing, HAP Contract, Should I buy?

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